I am in the process of crunching the numbers from today’s report on U.S. personal income and outlays. The monthly data came out at 8:30 EST this morning but I think the quarterly data is more interesting because it goes back to 1947, where the monthly data only goes back to 1959. Here’s a chart I created from the quarterly series on the personal savings rate.

As you can see, the savings rate in America has fallen off a cliff starting just around 1982. It’s no coincidence that this coincides exactly with a secular bull market in both bonds and stocks. But, notice the surge in savings since the recession began. The rolling 4-quarter average rate hit an all-time low of 1.5% in Q1 2008 when the recession began. As of last quarter it had reached 4.6%. This increase of 3.1% in 7 quarters is without precedent.

Bottom line: we have witnessed an increase in the savings rate the likes of which we have never seen since data tracking began.

I will stop there regarding conclusions, but, if you know your sectoral balances models, then you know what the flip side of this has meant for government deficits. Will it continue? That is the question we are all grappling with. The (non-rolling) quarterly data peaked in Q2 2009 at 5.4%. So I suspect that we have seen the peak savings rate for this business cycle. So, while Americans were increasing savings through the recession, they are no longer doing so.

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10 Comments

The chart shows the savings rate going up during recessions as well. Perhaps along with unemployment. Yes, the savings and investments in stocks were at one time advertised as good substitutes. The 401(k) was a sober, reasoned way of preparing for retirement. The house was an asset that couldn’t go down. Nostalgia….

But also note in the current situation that the savings rate is income minus expenditures, so it includes paying down debt. Debt is enormously larger today than it was even ten years, and especially twenty years ago.

right. Recessions are marked by retrenchment. That means higher savings rates. The retrenchment in 2008-09 was the worst on record post WWII. The question is: what next? I have been saying for some time, recovery means a temporary end to retrenchment and I see the statistics on savings as reflective of that. It’s no coincidence that the savings rate began to decline in Q3 just when I believe a technical recovery began

The chart shows the savings rate going up during recessions as well.
Perhaps along with unemployment. Yes, the savings and investments in stocks
were at one time advertised as good substitutes. The 401(k) was a sober,
reasoned way of preparing for retirement. The house was an asset that
couldn’t go down. Nostalgia….

But also note in the current situation that the savings rate is income
minus expenditures, so it includes paying down debt. Debt is enormously
larger today than it was even ten years, and especially twenty years ago.

That is true. Debt is significantly larger, but it’s largely private
sector debt. It’s cause and effect. When Government boasts that a $x billion
surplus (as the Democrats always proudly proclaim during the Clinton
period), this is tantamount to saying that non-government $ financial asset
savings recorded a decline of $x billion over the same period.
Thus if the Government is really believing it will achieve the surpluses
shown in the graph then they must be wanting the non-government $ financial
asset savings to decline by an equal amount. And that is exactly what
happened throughout the 1990s, as evidenced by the decline in the household
savings rate.

While I don’t see a chart showing surpluses, I agree with the larger point. In recent years, though, the private sector asset savings has been basically transferred to the public sector (including the Fed) as a function of backstopping bad instruments.

While I don’t see a chart showing surpluses, I agree with the larger
point. In recent years, though, the private sector asset savings has been
basically transferred to the public sector (including the Fed) as a function of
backstopping bad instruments.

Yes?

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It is more the case that the government surpluses has constrained private
demand and incomes, forcing greater reliance on private debt. That’s the
causation.

Yes. I see a connection. It occurs to me, though, that increased private sector savings whether to pay down debt or hoard against uncertainty, have a limit in the case of deep recessions, as people are forced to tap the “rainy day fund.”

Yes. I see a connection. It occurs to me, though, that increased private
sector savings whether to pay down debt or hoard against uncertainty, have
a limit in the case of deep recessions, as people are forced to tap the
“rainy day fund.”

It’s irrelevant whether the savings is used to pay down debt or “hoard
against uncertainty”. Either way, it improves their personal balance sheets
and enhances the ability to service debt. It reflects a predisposition by
the private sector to hold more cash. The accounting offset to that is
either other countries running trade deficits with the US or (more likely)
higher government deficits to accommodate that private sector savings impulse.

As Marshall says, in the aggregate numbers, paying down debt is functionally equivalent to saving. And for the indebted individual, paying down debt works to both increase net savings AND to reduce interest payments.

There does seem to be a qualitative difference between the current savings and that of more prosperous times. Backing up: Beginning in the 1980s “savers” were split off into those who saved by putting money in debt instruments and those who went after equities. Those who bought equities were subtractions from the savings rate. For a time, a long time, those who went after stocks were the smart ones, and still prudent. The nostrum “stocks have never fallen in any seven-year period” was replaced in the 2000s with “housing never goes down.” Now we see a series of bubbles, each one larger than the previous, ratified by the central bank.

But the “saver,” one can argue, was never different in her belief that she was behaving responsibly and wisely. It is likely, even, that savings and investment of households increased over the period, as boomers neared retirement.

Ha.

Now the savers are back to basics. Their saving is a straightforward subtraction from spending, but is — as Steve Keen talks about — a bigger subtraction from spending plus borrowing, which is the full definition of effective demand, and so is a crushing blow to economic activity. The federal government’s discretionary and automatic stabilizers may provide a bottom, but in the current outlook will not get us out of the mess.

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